(Adds Facebook and Lehman in Lawsuits section, Longoria and Galleon in Verdicts and Rajaratnam in On The Docket.)
July 1 (Bloomberg) -- Paul Ceglia, who claims half the holdings of Facebook Inc. co-founder Mark Zuckerberg, must produce originals of the contract and e-mails that he says prove his case, a judge ordered at the request of the company.
U.S. Magistrate Judge Leslie Foschio in Buffalo, New York, said yesterday that Ceglia must allow forensic testing of the documents as well as his computer. The company said an examination of Ceglia’s documents and computer is needed to unmask a “fraud on the court.” Ceglia’s lawsuit was filed a year ago yesterday.
Both sides agree that Ceglia, 37, hired Zuckerberg, then a freshman at Harvard University, to work on Ceglia’s StreetFax.com project in April 2003. Facebook says its name wasn’t mentioned in the contract with Ceglia and that Zuckerberg didn’t come up with the idea for the service until 2004. Facebook claims the contract is a phony and says e-mails Ceglia used as evidence of his claim are fabricated.
Facebook said it has the genuine e-mails between Zuckerberg and Ceglia, which make no mention of Facebook and show Ceglia making a series of excuses for not paying Zuckerberg money he owed him.
A lawyer for Ceglia, Jeffrey Lake, said in yesterday’s hearing there’s no way to tell if Zuckerberg deleted e-mails on a Harvard University server.
Foschio yesterday directed Facebook to give Ceglia access to 176 e-mails between Zuckerberg and Ceglia. The magistrate judge denied Ceglia’s request for all of Zuckerberg’s documents prior to July 2004.
In an amended complaint filed in April, Ceglia quoted from e-mails he said he exchanged with Zuckerberg. He said the messages support his claim that the two men formed a partnership that gave Ceglia half ownership of Facebook when it was started in 2004.
Ceglia hasn’t shown the original contract publicly or to representatives of Facebook. The two-page document is in a bank safe-deposit box in Hornell, New York, according to Ceglia’s lawyers. Ceglia claims he cut and pasted his e-mails with Zuckerberg from a Web-based e-mail program into word-processing documents that he saved on floppy discs.
The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).
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Fannie Mae Silence on Taylor Bean Led to $3 Billion Fraud
The first sign of what would ultimately become a $3 billion fraud surfaced Jan. 11, 2000, when Fannie Mae executive Samuel Smith discovered Taylor, Bean & Whitaker Mortgage Corp. sold him a loan owned by someone else, Bloomberg News’ Tom Schoenberg reports.
Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, determined over the next two years that more than 200 loans acquired from Taylor Bean were bogus, non-performing or lacked critical components such as mortgage insurance.
That might have been the end of Taylor Bean and its chairman and principal owner, Lee Farkas. He was sentenced yesterday in federal court in Alexandria, Virginia, to 30 years in prison for orchestrating what prosecutors call one of the “largest bank fraud schemes in this country’s history.”
Instead, it was just the beginning.
Fannie Mae officials never reported the fraud to law enforcement or anyone outside the company. Internal memos, court papers, and public testimony show it sought only to rid itself of liabilities and cut ties with a mortgage firm selling loans “that had no value,” as Smith, the former vice president of Fannie Mae’s single family operations, said in a 2008 deposition.
“If there had been a criminal referral, Farkas would have gone to jail in 2002,” William Black, who served as deputy director of the Federal Savings and Loan Insurance Corp. during the S&L crisis of the 1980s, said in an interview.
Seven more years passed before federal regulators shut down Ocala, Florida-based Taylor Bean and prosecutors charged Farkas with orchestrating the $3 billion scam. He had duped some of the country’s largest financial institutions, sought federal bank bailout funds and contributed to the failures of Montgomery, Alabama-based Colonial Bank and its parent, Colonial BancGroup, once among the nation’s 25 biggest depository banks.
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court for the Eastern District of Virginia (Alexandria).
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Countrywide Must Face MBIA Fraud Claim, Appeals Court Rules
Bank of America Corp. and its Countrywide Financial Corp. unit must face a fraud claim brought by bond insurer MBIA Insurance Corp., an appeals court ruled.
The New York court yesterday upheld an April 2010 trial- court denial of Countrywide’s motion to dismiss the claim against it in the 2008 suit. MBIA alleges that Countrywide fraudulently obtained insurance on billions of dollars of mortgage-backed securities.
MBIA claims the lender falsely represented loan-to-value ratios, debt-to-income ratios and borrowers’ FICO scores; provided prospectuses that falsely represented loans were made in compliance with Countrywide’s underwriting standards; and offered false, misleading or inflated ratings for the loans, according to the decision.
“Because MBIA alleges misrepresentations of present fact, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives,” Associate Justice Rosalyn H. Richter wrote.
MBIA contends that if it had known the representations were false, it would never have guaranteed the notes and suffered losses. As a result of defaults, MBIA alleges, it has been forced to make billions of dollars in claims payments on the insurance agreements, according to the decision.
The appeals court also upheld the dismissal of a negligent- misrepresentation claim in the case. It dismissed entirely a claim for breach of implied duty of good faith and fair dealing, which the lower court narrowed.
“We continue to believe MBIA is a sophisticated counter- party that cannot sustain a fraud claim, and we continue to have the ability to raise that point with the court at the summary- judgment phase,” Shirley Norton, a spokeswoman for Bank of America, said in an e-mailed statement.
Norton added the bank is pleased the appeals court confirmed the dismissal of the negligent-misrepresentation claim and dismissed the good-faith and fair-dealing claim.
The appeal is MBIA Insurance Corp. v. Countrywide Home Loans Inc., New York State Supreme Court, Appellate Division, First Department (Manhattan). The lower-court case is MBIA Insurance v. Countrywide, 6028245/2008, New York state Supreme Court (Manhattan).
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BofA Opposes Arizona AG Bid to Interview Former Workers
Bank of America Corp. opposes a request by the Arizona attorney general’s office to interview former employees as part of a state lawsuit against the bank over mortgage modifications.
The state is seeking court approval to conduct interviews with non-management former employees without bank attorneys present so it can “fully investigate” Bank of America’s practices, according to court papers.
Bank of America argues such interviews are prohibited and asked the court to prevent the attorney general from “maneuvering around Arizona’s discovery and ethical rules,” according to court papers filed June 27.
In its lawsuit, Arizona accuses Bank of America of misleading homeowners who were seeking loan modifications, saying the bank “repeatedly has deceived” borrowers about the process, according to the complaint.
“It is crucial that the state be permitted to interview former employees without the presence of defendants’ counsel so that these witnesses can speak freely and without interference, and the state can carry out its investigation and discover the truth,” the office said in court papers.
The case is Arizona v. Countrywide Financial Corp., CV2010- 033580, Arizona Superior Court, Maricopa County.
UniCredit, HSBC Seek to Dismiss Madoff Investor Suit
UniCredit Bank Austria AG and other defendants asked a judge to dismiss a lawsuit by foreign investors in funds that put money with con man Bernard Madoff, saying they were being cast as “scapegoats for Madoff’s intentional criminal acts.”
The investors in January and February sued Herald, Primeo and Thema funds, directors, service providers and parent companies or affiliates, saying they neglected their duty and ignored “red flags” signaling Madoff was running a Ponzi scheme. Defendants include JPMorgan Chase & Co., HSBC Holdings Plc, PricewaterhouseCoopers LLP, Bank Medici AG founder Sonja Kohn and Madoff family members.
Denying they had a duty to the investors, the plaintiffs said they’d been “improperly” lumped together based on “manufactured claims” that “have no place in this U.S. court,” according to a U.S. District Court of New York filing yesterday.
The suit is one of many that competes with 1,000 suits filed by the trustee liquidating Madoff’s firm. Irving Picard in December sued HSBC and a dozen funds including Primeo, Herald and Thema for $9 billion, saying they ignored red flags and should have known of the fraud. He is demanding $19 billion from JPMorgan and as much as $59 billion from UniCredit, Kohn and other parties.
HSBC units in Bermuda, Luxembourg and Dublin acted as custodian for 12 funds including Pioneer Investment’s Primeo Select, Bank Medici’s Herald (Lux) and Thema International, as well as Herald USA, Alpha Prime, Lagoon Investment, Senator, Kingate Global, Defender and Global Investments.
Primeo, based in the Cayman Islands, was tied to Bank Medici and Kohn, according to Picard’s suit. Primeo took $145 million, mostly its principal, out of the Madoff firm in the six years before the 2008 bankruptcy, which Picard is seeking to recover, he said in the suit. Its profit was a scant $27,942, according to Picard. The fund is being liquidated.
The trustee said total six-year withdrawals by funds he named in the HSBC suit were $2 billion.
HSBC has asked U.S. District Judge Jed Rakoff in New York to dismiss Picard’s suit, saying it didn’t know of the fraud and lost $1 billion of its own money investing in funds that in turn put money with Madoff.
Madoff is serving a 150-year sentence in federal prison in North Carolina.
The case is In re Herald, 09-cv-00289, U.S. District Court, Southern District of New York (Manhattan).
Ebix Inflated Earnings by Ignoring Bad Debt, Court Is Told
Ebix Inc., a business software provider whose acquisitions have made it one of the fastest growing small-cap companies, inflated earnings by overstating accounts receivable, according to an executive who sued Ebix after it bought his firm, Bloomberg News’ Greg Farrell reports.
The size of the overstatement was approximately $200,000, according to a complaint filed May 24 in federal court in Columbus, Ohio. It allegedly occurred in the fourth quarter of 2009, representing almost 1.7 percent of Ebix’s net income of $12.1 million for the period on revenue of $31.3 million.
Shares in Atlanta-based Ebix, which provides data processing software to the insurance industry, climbed from $3 in January 2007 to $29 in March of this year. Among the 800 firms with market capitalization between $500 million and $2 billion, Ebix surpassed all but ten in terms of market-cap growth over the past four years, according to data compiled by Bloomberg.
During that same period, short interest in the stock has grown at the fourth fastest rate. After Ebix shares dropped 14 percent this year through June 15, the proportion of the company’s stock sold short surged to a record 27 percent, according to Data Explorers, a New York-based research firm.
“When a quarter or more of the shares have been sold short, it’s certainly indicative that investors question the legitimacy of the company’s reported results,” said Lynn Turner, former chief accountant of the U.S. Securities and Exchange Commission.
The allegations of billing irregularities come from Steven Isaac, former chief executive officer of Peak Performance Solutions, and two directors of the firm, Earl Gallegos and Richard Freeman. The three men sold the company to Ebix in September 2009 for $8 million. Peak produces risk management and compliance software for the insurance industry.
Robin Raina, Ebix’s CEO, said the overstatement was only $150,000, and that it was discovered by Ebix management early in 2010 and corrected immediately.
“That revenue is from the first quarter of 2010. In the second quarter of 2010, we called it uncollectible,” Raina said. “Their complaint, it’s completely wrong.”
He also said the sum involved was insignificant for a company projected to generate more than $170 million in revenue for 2011. Ebix, which had a market capitalization of $803 million as of June 29, reported full-year 2010 net income of $59 million on revenue of $132.2 million.
The case is Isaac v. Ebix Inc, 11-00459, U.S. District Court for the Southern District of Ohio (Columbus). The ConfirmNet case is Irving v. Ebix, 10-00762, U.S. District Court for the Southern District of California (San Diego).
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Lehman Brokerage Seeks $346 Million From RBS Over Swap
Lehman Brothers Holdings Inc.’s brokerage asked a judge to force Royal Bank of Scotland Group Plc to pay $346 million owed to the defunct firm.
ABN Amro, now owned by Royal Bank, owes the money, plus interest, to Lehman Brothers Inc. for early termination of a 1998 swap agreement, the brokerage said in a filing in U.S. Bankruptcy Court in Manhattan. Royal Bank refuses to pay, saying it has a right to set off the funds against amounts owed to it by the brokerage and its affiliates, brokerage trustee James Giddens said in a June 29 filing.
“The trustee has a right to recover the withheld funds based on simple and straightforward principles of contract law,” he said.
Pholida Phengsomphone, a spokeswoman in Connecticut for Edinburgh-based Royal Bank, declined to comment.
The Lehman brokerage, like its bankrupt parent, is seeking money from banks it did business with to pay customers. Citigroup Inc. asked a judge in May to dismiss most of a $1.3 billion lawsuit brought by Giddens, saying he had no legal claim on most of the money.
Barclays Plc has said it will appeal a judge’s order that it return $2 billion in margin assets to Giddens and pay about $270 million in interest.
The Lehman parent filed the largest bankruptcy in U.S. history on Sept. 15, 2008. The brokerage went into liquidation four days later.
The brokerage bankruptcy case is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Birmingham’s Yeung Charged With Hong Kong Money Laundering
Carson Yeung, the former hairdresser who bought control of English soccer club Birmingham City in 2009, was charged with money laundering in a Hong Kong court.
The police brought five charges against Yeung, 51, for dealing with property “known or believed to represent proceeds of an indictable offense,” with a total value of HK$721.3 million ($93 million), according to documents read in court yesterday. He was granted bail, with a hearing scheduled for Aug. 11.
Shares in Birmingham International Holdings Ltd., the West Midlands-based team’s parent company, were suspended from trading in Hong Kong yesterday, according to a statement to the city’s stock exchange. Peter Pannu, Birmingham’s acting chairman, said in a statement yesterday that the investigations didn’t have any connection with that company or any of its subsidiaries.
“This does not appear to be a strong case whatsoever” as prosecutors haven’t said what crime the money is supposed to have come from, Daniel Marash, Yeung’s lawyer, said in court.
Yeung, who was detained yesterday, was released after posting bail of HK$4 million in cash, and HK$3 million in cash guarantees from two supporters. No plea was taken.
The charges against Yeung have the “hallmark of money laundering” according to forensic experts, Hayson Tse, a lawyer representing the prosecution, said in court yesterday. Each charge is punishable by as long as 14 years in jail and a fine of as much as HK$5 million.
The case is Hong Kong Special Administrative Region and Yeung Ka-sing Carson, ESCC2717/2011 in the Hong Kong Eastern Magistrates’ Court.
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BJ’s Wholesale Sued by Investor Over $2.8 Billion Takeover
BJ’s Wholesale Club Inc., the third-largest U.S. warehouse- club chain, was sued by an investor claiming its proposed $2.8 billion takeover price is “grossly inadequate”.
Leonard Green & Partners LP is acquiring the company at a “substantial” discount to its true value and BJ’s directors locked up the deal by agreeing to “impermissible” deal- protection devices, lawyers for shareholder Maxine Phillips said in the complaint filed June 29 in Delaware Chancery Court. Phillips is seeking to represent all BJ’s shareholders in her bid to bar the deal.
Directors “have effectively placed a cap on BJ’s corporate value at a time when the company’s stock price was recovering from the recent economic decline,” lawyers for Phillips said in the complaint.
Under the agreement, Leonard Green and CVC Capital Partners will pay BJ’s investors $51.25 in cash for each share they hold. The takeover gives the firms BJ’s 190 wholesale clubs in 15 U.S. states for a valuation of about 7.1 times earnings before interest, tax, depreciation and amortization.
Cathy Maloney, a spokeswoman for BJ’s, didn’t return a phone call seeking comment on the complaint.
The case is Maxine Phillips v. BJ’s Wholesale Club, CA6623, Delaware Chancery Court (Wilmington).
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Ex-Taylor Bean Chairman Gets 30 Years for $3 Billion Fraud (1)
Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., was sentenced to 30 years in prison for leading a $3 billion fraud involving fake mortgage assets.
Farkas was also ordered by U.S. District Judge Leonie Brinkema in Alexandria, Virginia, to forfeit more than $38 million.
“I actually don’t believe you accept responsibility for these criminal acts,” Brinkema said yesterday as she handed down the sentence. “This was a very serious series of crimes.”
A federal jury convicted Farkas, 58, in April of 14 counts of conspiracy and bank, wire and securities fraud after a two- week trial. Prosecutors said Farkas orchestrated one of the largest and longest-running bank frauds in the U.S., which duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank.
“I believe that everyone at TBW and Colonial Bank were acting together in good faith to help each other,” Farkas read from a statement.
Prosecutors in a June 24 court filing asked U.S. District Judge Leonie Brinkema to order Farkas to prison for 385 years or no less than 50 years, “a period of years that would ensure that Farkas will remain in prison for life.”
Bruce Rogow, a lawyer for Farkas, urged Brinkema to send his client to prison no more than 15 years.
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).
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Ex-AMD Employee Mark Longoria Pleads Guilty in New York
Mark Anthony Longoria, a former employee of Advanced Micro Devices Inc. charged in a U.S. probe of insider trading by hedge fund managers and expert networking consultants, pleaded guilty to a four-year fraud scheme.
Longoria, 45, of San Antonio, Texas, yesterday admitted to four crimes: conspiracy to commit securities and wire fraud, securities fraud, wire fraud and making false statements to prosecutors and FBI agents.
He faces as long as 50 years in prison, said U.S. District Judge Jed Rakoff in Manhattan. Longoria is cooperating with prosecutors, and Rakoff said he could face a lesser term because of his assistance to the government.
Longoria admitted in court that he passed tips about AMD’s gross margins and revenue to hedge fund managers, and he also provided inside information about Western Digital Corp., a hard- drive maker based in Irvine, California, when he worked for them in 2006. He said he provided the information to fund manager clients of Primary Global Research LLC, an expert networking firm in Mountain View, California, that provides experts to investors.
Longoria said that while an employee at AMD, he also worked as a consultant for Primary Global, where he was paid $300 per telephone call to pass inside information about the chipmaker to hedge fund clients of the expert networking firm. He told the judge that he earned about $200,000 during a scheme which he said operated from 2006 to 2010.
Primary Global “paid me for providing material, nonpublic information, mostly by telephone, to its hedge fund clients,” Longoria said in court. “I believed at the time that the hedge funds would use the nonpublic information I gave them to make trading decisions.”
Dan Charnas, a spokesman for Primary Global, declined to comment on Longoria’s statements about the firm. Steven Shattuck, a spokesman for Western Digital, didn’t return a voice-mail message left at his office seeking comment.
Michael Silverman, a spokesman for AMD, said that “AMD is the victim of an insider trading scheme.” The company has policies against insider trading and regarding outside work by employees, he said in a statement. “It appears that Mr. Longoria violated those policies,” Silverman said.
The case is U.S. vs. Shimoon, 10-mj-02823, U.S. District Court, Southern District of New York (Manhattan).
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Ex-Lawyer Cutillo Gets 2 1/2 Years in Insider Trading Case
Arthur Cutillo, a former Ropes & Gray LLP lawyer who pleaded guilty in the Galleon Group LLC insider-trading case, was sentenced to 2 1/2 years in prison.
U.S. District Judge Richard Sullivan in New York imposed the sentence yesterday and ordered Cutillo to forfeit $378,068 along with two other defendants. He must surrender to prison authorities by Sept. 16, the judge ruled.
“You were one of the winners in life,” Sullivan said. “At the time of the crime, you were a respected attorney. You were earning more than $200,000. Yet it wasn’t enough.”
Cutillo pleaded in January to one count of conspiracy and securities fraud. He admitted disclosing information on transactions the firm was working on to another co-defendant, Jason Goldfarb, in exchange for kickbacks.
“I just want to apologize to everybody I hurt,” Cutillo, 34, of Newark, New Jersey, said yesterday in court. “I know what I did was terribly wrong. Not only did I betray my law firm, I betrayed everyone I believed in. I’m sorry.”
Prosecutors said information from Cutillo was passed on to former Galleon trader Zvi Goffer, allowing Goffer and others to earn more than $7 million.
Catherine L. Redlich, Cutillo’s lawyer, asked Sullivan to impose no prison time, citing the welfare of her client’s four young children.
The case is U.S. v. Goffer, 10-cr-56, U.S. District Court, Southern District of New York (Manhattan).
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Economist Stiglitz Seeks $1 Million From Former Divorce Lawyer
Economist Joseph E. Stiglitz is asking a federal jury in Washington to award him more than $1 million in damages from his former lawyer, who he says failed to file divorce papers in time to prevent his second wife from claiming part of his $300,000 Nobel Prize money.
Jury selection began yesterday in the trial of Stiglitz’s professional-negligence suit again Rita M. Bank of Ain & Bank in Washington. The trial, scheduled to last six days, will include testimony by Stiglitz and divorce lawyers from New York and Washington, according to court papers.
Stiglitz, 68, who shared the Nobel in 2001, alleges he lost more than $5 million because Bank kept him in the dark about her loyalties, according to court papers. Jane Hannaway, Stiglitz’s second wife, filed for divorce in 2002.
Bank, who has denied the allegations, declined to comment, as did Stiglitz, who is scheduled to travel to Beijing this weekend to be sworn in as president of the International Economic Association.
Bank never told Stiglitz she had consulted with Hannaway about a potential divorce before he hired her to represent him in August 2000, according to a complaint filed in 2005 in Washington.
Stiglitz said in court papers that he repeatedly asked Bank to file divorce papers in Washington in 2000 and 2001 to limit his financial exposure, though this was never done.
“Bank assured Stiglitz that he would be better off continuing to negotiate rather than filing suit,” Stiglitz alleges.
The case is Stiglitz v. Bank, 05-1826, U.S. District Court, District of Columbia (Washington).
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On The Docket
Rajaratnam’s Sentencing Rescheduled for Sept. 27, Judge Says
Raj Rajaratnam’s sentencing on insider-trading charges was rescheduled to Sept. 27 from July by a federal judge in New York.
Rajaratnam, 54, the co-founder of Galleon Group LLC, is at the center of one of the largest illegal stock-tipping cases ever brought by the U.S. He was found guilty May 11 by a jury on five counts of conspiracy and nine counts of securities fraud.
When he was convicted, U.S. District Judge Richard Holwell set sentencing for July 29. Yesterday’s order by Holwell postponing the date included a letter from prosecutors saying that they and Rajaratnam agreed to it.
The U.S. said Rajaratnam engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. He gained $63.8 million as a result of the scheme, prosecutors said.
Prosecutors said on the day of the verdict that Rajaratnam faces from 15 1/2 years to 19 1/2 years in prison when he is sentenced.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
--With assistance from Karen Freifeld, David McLaughlin, Linda Sandler, Chris Dolmetsch, Patricia Hurtado, Bob Van Voris and Greg Farrell in New York; Tom Schoenberg in Washington; Tariq Panja in London; Sophia Pearson in Wilmington, Delaware; and Sophie Leung in Hong Kong. Editor: Glenn Holdcraft
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